(Bloomberg) — Just when it seemed like things were getting back to normal at Rhett Ricart’s Columbus, Ohio, car dealerships — after pandemic-induced inventory shortages and runaway price inflation — a new obstacle emerged to keep buyers from closing the deal: soaring interest rates on auto loans.
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“They get interest shock,” said Ricart, who owns stores that sell models by Ford Motor Co., General Motors Co., Nissan Motor Co. and others. “Customers aren’t shocked by the increased cost of the vehicle, they’re shocked that they’ve got to pay 7% or 8% to finance it. You’re talking tons of money.”
As the Federal Reserve steadily increased the federal funds rate over the last year to try to tame inflation, the average interest rate on loans for new cars jumped to 8.95% last month, up from 5.66% a year earlier, according to researcher Cox Automotive. That, along with average car prices that now approach $50,000, has driven auto loan payments to $784 a month on average, up about $177 a month since March 2020 when the pandemic began.
Dealers now say interest rates are the No. 1 issue holding their business back, replacing inventory shortages and the economy as the top problems a year ago, a Cox survey of auto retailers showed. Those rising rates are sapping the market’s momentum even as auto sales in the first quarter are expected to rise by as much as 7.3%, according to a forecast by J.D. Power and LMC Automotive.
Many of the largest car companies, including General Motors and Toyota Motor Corp., will report quarterly US sales results on Monday.
“A lot of these things that appeared to be tailwinds at the very beginning of the year have rapidly turned into headwinds,” Jonathan Smoke, Cox’s chief economist, told reporters March 27. “Anybody that tells you they have a firm view of where we’re headed is, I don’t know what, they’re smoking something.”
On top of rising loan rates, the banking crisis triggered by the collapse of Silicon Valley Bank last month has further tightened credit, making it harder to qualify for a car loan.
Yet automakers remain confident there are millions of buyers ready to flood dealer lots as pent-up demand is unleashed after years of supply shortages and pandemic-related factory and showroom shutdowns.
The annual selling rate is expected to rise to 14.4 million in March, from 13.5 million a year ago, according to the average forecast of eight market researchers. Prior to the pandemic, annual US auto sales topped 17 million for five consecutive years.
“Consumer confidence or at least consumer behavior, will still continue to be resilient,” Chris Reynolds, Toyota’s chief administrative officer in North America, told reporters. “People still have money in their pockets, and they still want to buy cars.”
In fact, buyer confidence fell this month in the University of Michigan Consumer sentiment index.
“A lot of the so-called pent-up demand has basically been destroyed because of the lethal combination of prices, interest rates and payments,” Smoke said.
Automakers are attempting to offset higher interest rates by offering discounted financing. Ohio dealer Ricart said Ford has made a big difference by offering 1.9% financing for 60-month loans on pickup trucks in his area.
Eating Profitability
Automakers’ profits swelled over the last three years as supply-chain snags caused inventory to dwindle and prices to hit record levels. Now that supply is catching up with demand, the companies are giving up some profit to try to keep cars affordable.
“We can’t pass on all of the costs, that means we’re eating it in our profitability,” Jack Hollis, executive vice president of Toyota’s North American unit, told reporters. “How much can the consumer take, month after month of increasing” prices?
The semiconductor shortage that emptied dealer lots in recent years is fading as inventories rose 70% since this time last year, according to Cox. Cars are now sitting on dealer lots an average of 34 days before being sold. That’s up from 24 days a year ago, data from automotive researcher Edmunds.com show.
Those favorable factors are still being offset by rising interest rates. The interest paid on an average auto loan reached $8,764 in February, up from $5,395 a year earlier, according to Edmunds.
“It’s a daunting prospect to sign your name to a $40,000 loan in this environment,” Jessica Caldwell, executive director of insights at Edmunds, said in an interview. “People are going to look at the monthly payment and they’re going to walk.”
In Columbus, Ricart is seeing buyers cancel orders for hard-to-get models that they they signed up for months ago, when financing was cheaper.
“When they ordered them the interest rate was 2% and now it’s 8%,” Ricart said. “They’re going to end up paying a lot more for that vehicle than they’d planned.”
–With assistance from Gabrielle Coppola.
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Source: finance.yahoo.com